BusinessDay

The Nigerian code of corporate governance, 2018 (4)

Principle 4 – The Managing Director/CEO

“Leaderless teams are not unknown. The Orpheus Chamber Orchestra performs Beethoven symphonies without a conductor. Special forces conduct missions without a commissioned officer. Yet these are the rare exceptions. Virtually every team – whether a rowing crew seeking a championship or a company executing a strategy – requires a capable leader,” Boards That Lead – Charan, Carey & Useem.

The fourth Principle of the Nigerian Code of Corporate Governance 2018 deals with the role of the Managing Director/Chief Executive Officer (MD/CEO). “The Managing Director/Chief Executive Officer is the head of management delegated by the Board to run the affairs of the Company to achieve its strategic objectives for sustainable corporate performance.”

The titles MD (Managing Director) and CEO (Chief Executive Officer) typically mean the same thing. Both refer to the operational leader of the business and would normally be appointed by and report to the Board of Directors. Both are employees of the business, engaged to do a clearly defined set of tasks with clearly identified performance targets. The title of Managing Director is sometimes used where the individual is not a member of the Board. The distinction is however being eroded by an emerging trend of appointing the person with day-to-day responsibility to the Board. This has the advantage of making that person more aware of the Director’s liabilities for corporate actions, of the Board’s need for information and of the importance of alignment between the objectives of the shareholder, the Board, and Management.

Although the primary authority for the governance, direction and control of the company is vested on the Board, the Board would typically and for practical purposes delegate some of its authority to the CEO. To ensure that there is clarity in this regard, a Delegation of Authority Document (DoA) is imperative. The DoA will set out the limits of the CEO’s delegated authority, matters that are exclusively reserved for Board approval, those that the CEO can deal with without recourse to the Board and in respect of which he/she must report and those matters that don’t need to come to the Board at all.

The CEO is then required to take responsibility for the day-to-day operations and management of the organisation. Consequently, the success or otherwise of a company hinges to a large extent on choosing the right CEO. This responsibility is squarely that of the Board, as is picking the right replacement for a departing CEO.

The CEO is responsible for ensuring that the Board is provided with adequate and accurate information in a timely fashion with respect to corporate performance, risk, and other exposures and all such information as shall enable the Board effectively fulfill its governance responsibilities. Whilst the Board would expect to receive periodic reports at Board and Committee meetings, the CEO should bring to the Board’s attention such matters as may affect corporate performance, well-being, and reputation in between meetings. The CEO is expected to take the initiative with respect to the reporting format and content, however, the Board is at liberty to provide guidance in this regard. Sharing accurate information freely with the Board (even where it is not good news) is a sure way of winning and sustaining the trust and confidence of the Board.

The CEO is responsible for ensuring proper implementation and achievement of the company’s strategic imperatives to ensure sustainable development and growth. According to the Code, the CEO “should demonstrate entrepreneurial skills, credibility, and integrity and have the confidence of the Board and management”. Without a doubt, the CEO has to take the lead role and is fully responsible for advancing the success of the enterprise. Whilst the Board will provide the leadership required to actualize the Company’s strategic objectives, execution, and the initiatives that will see the actualization of those objectives form the crux of the CEO’s KPIs.

In this regard, the CEO is expected to remain up-to-date with economic, socio-political, and industry developments and trends, locally and internationally.

The Code recommends that the powers and responsibilities of the CEO and the relationship between him and the Board should be clearly set out in a contract of employment. It is expected that the Board will clearly define the Key Performance Indicators (drawn from the Company’s strategic objectives) against which the CEO’s performance will be measured as well as a formal process for undertaking the appraisal.

To develop a collaborative relationship with the Board, the CEO should meet and consult with the Board Chairman periodically. Due care should however be taken not to side-line the other Directors or give the impression that Board meetings are a mere formality to ratify decisions taken outside the Boardroom.

Read also: The Nigerian code of corporate governance, 2018

As the head of the management team, the CEO is expected to provide inspiring leadership to his/her team and represent the Company in its dealing with external stakeholders. The CEO is expected to establish a culture of integrity, conformance, and performance which should be assimilated by personnel at all levels of the Company. He/she should set the appropriate tone and “walk the talk”. In setting performance targets, the CEO should ensure that due regard is had to the Company’s core values and ethical culture. Hiring, firing and compensation decisions should be guided by organizational values.

Given the looming and larger-than-life persona of the CEO and to ensure the autonomy and independence of the respective Board Committees the Code recommends that the CEO shall not be a member of the Committees responsible for remuneration, audit, or nomination and governance.

The CEO is expected to promote and protect corporate interests. Accordingly, the interest of the Company shall always be paramount and where there is a conflict, the CEO shall disclose such conflict. Clearly, mere disclosure and recusal will not always cure a conflict and in such instances, the Board shall take that decision which is in the best interest of the enterprise. The Code requires the CEO to declare any conflict of interest on appointment and annually thereafter.

As a general rule, the CEO shall not go on to become Chairman. However, wherein “very exceptional cases” the Board considers this appropriate and in the best interest of the organization, the CEO may be appointed Chairman after a cool-off period of three years. It is permissible for the CEO to be appointed a Non-Executive Director (NED) on the Board of another company, provided the said position is not detrimental to his/her responsibilities as CEO and in accordance with Board-approved company policy.

Clearly, the CEO plays a fundamental role in the overall operations of the company and is expected to display exemplary leadership. As a model of what the organisation projects to internal and external stakeholders, the CEO is expected to effectively carry out his/her responsibilities with integrity. The CEO’s conduct must be consistent with the corporate values and should not bring the organisation to disrepute. “The greater a man is in power above others, the more he ought to excel them in virtue. None ought to govern who is not better than the governed” – PubliliusSyrus.

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